Mortgage rates have rebounded to levels not seen since July following signals from the Federal Reserve last week that it may start cutting its purchases of long-term mortgages and Treasury bonds later this year.
The Fed’s debt purchases have helped keep long-term interest rates low. But that’s not all that can scare investors off buying mortgage debt. There’s also the fast-approaching US debt ceiling deadline and uncertainty over who will lead the Federal Reserve next year.
While it is too early to say whether the forces that drive up long-term interest rates will be sustainable, housing industry leaders are keeping a close watch on rising mortgage rates, which could limit the power of housing. purchasing potential buyers. , sales and prices of dented homes.
From a September 22 press conference in which Fed policymakers made it clear that they could begin to gradually reduce Fed debt purchases later this year, Optimal blue data shows that mortgage rates climbed 11 basis points, from 3.067% on Tuesday, September 21 to 3.181% on Monday, September 27.
Rates on 10-year Treasury bills – an indicator of the direction mortgage rates are going – jumped 20 basis points until Tuesday, September 28.
Optimal Blue Mortgage Market Indices
If temporary, this kind of volatility is not unusual and can actually serve to deter potential buyers as they want to lock in rates, said Fannie Mae deputy chief economist Mark Palim.
As late as November 2018, average 30-year fixed-rate mortgage rates were approaching 5%, so today’s rates “are still quite low by historical standards,” said Palim.
“If you had a long, sustained increase in mortgage rates, that would be of more concern to me,” Palim said, pointing to recent weakness in buyer sentiment in Fannie Mae’s Monthly National Housing Survey.
In the latest survey, 63 percent of consumers said they thought it was the wrong time to buy a home, frequently citing high home prices and lack of supply as the reasons.
A sharp rise in interest rates, like the “taper tantrum” of 2013, can impact home prices and sales, Palim said. In the taper tantrum of 2013, mortgage rates climbed more than 100 basis points – a full percentage point – in just eight weeks.
“We have seen home sales drop 10% and home price appreciation slow,” Palim said.
Lawrence Yun, chief economist of the National Association of Realtors, called the recent rise in long-term interest rates a delay.
“While this may be due to the uncertainty resulting from the deadlock over US debt default, I believe it is due to the greater recognition of higher inflation,” Yun said by th -mail. “The Federal Reserve revised its inflation forecast and Fed Chairman Powell changed his speech to involve him as such.”
Higher inflation for a longer period “means that lenders want additional compensation for the dollar’s loss of purchasing power when the borrowed money is returned at a future date,” Yun said. “This is why the 10-year Treasury yield increases and, as a result, pushes mortgage rates up.”
The Fed’s influence on long rates
Although the Federal Reserve exercises tight control over short-term federal funds rates, it is only one of many players in the long-term debt market.
The ultimate source of funding for most US mortgages are investors who purchase Mortgage Backed Securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Increased investor demand for MBS can lower the rates paid by borrowers.
During the pandemic, the Fed was one of those investors, increasing its holdings of MBS by $ 40 billion per month, while boosting its holdings of public debt by $ 80 billion per month.
The Fed’s emergency debt purchases helped keep long-term interest rates low. In Freddie Mac’s records dating back to 1971, 30-year fixed-rate mortgage rates hit an all-time low of 2.65% in the week ending Jan. 7, 2021.
Debt purchases “were very, very important at the start of the crisis,” Federal Reserve Chairman Jerome Powell said last week. “Now we’re in a situation where they still have some use, but it’s time for us to start reducing them. Their usefulness is much less as a tool than it was at the very beginning.
With the Fed now holding nearly $ 8 trillion in mortgage and government debt, Powell and other members of the Fed’s board of governors have laid the groundwork for reduction in recent months. By telegraphing their intentions, Fed policymakers hope to avoid an investor panic like the “taper tantrum” of 2013, when the Fed considered slowing down debt purchases undertaken during the financial crisis and recession of 2007-09.
While the Fed deliberated behind closed doors in early 2013, the public did not get wind of it until President Ben Bernanke testified before Congress on May 22, 2013, according to a Reuters analysis when full meeting transcripts were released in 2019.
Impact of the 2013 “taper tantrum” on mortgage rates
In just eight weeks, 30-year fixed-rate mortgage rates climbed 111 basis points, from 3.35% in the week ending May 2 to 4.46% on June 27. As of August 22, rates had hit their 2013 high of 4.53 percent.
“This year’s lessons resonate today, as Fed policymakers once again debate the fate of the central bank’s massive balance sheet and tackle the market turmoil that occurs when investor policy expectations fall. at odds with theirs, “Reuters noted in its analysis.
The Fed had only started to cut back on the massive debt purchases it made to support the economy after the 2007-09 recession when the pandemic hit. Today, with debt on the Fed’s balance sheet resulting from quantitative easing approaching $ 8 trillion, policymakers want to reduce the Fed’s holdings – in part, so that it is able to meet the demands of the Fed. the next crisis.
Fed’s quantitative easing approaches $ 8 trillion
Uncertainties over the debt ceiling and the Fed’s leadership
In addition to concerns about the potential impact of the Fed’s tapering, there are also uncertainties about the approach of the US debt ceiling and the future leadership of the Fed.
Congress is deadlocked on raising or suspending the cap on the amount the government can borrow, Politco Reports, both parties playing chicken as Democrats try to pass a bill that allows billions of dollars in spending on social programs. Meanwhile, Treasury Secretary Janet Yellen warns Congress has only about three weeks to act.
“We now estimate that the Treasury will likely exhaust its extraordinary measures if Congress has not acted to increase or suspend the debt limit by October 18,” Yellen warned Tuesday in a letter to Speaker of the House Nancy Pelosi. “At this point, we would expect the treasury to end up with very limited resources that would quickly run out.”
Of previous deadlocks, Yellen said, “We know… that waiting until the last minute can seriously damage business and consumer confidence, increase borrowing costs for taxpayers and negatively impact credit scores. United States for years to come. Failure to act quickly could also lead to substantial disruption in financial markets, as increased uncertainty can exacerbate volatility and erode investor confidence. “
When Congress waited until the last minute to raise the debt ceiling in 2013, long-term Treasury bill rates jumped 21 to 46 basis points, according to a analysis by the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy.
The policy also creates some uncertainty about the Federal Reserve’s future policies. Not only will Powell’s tenure as Fed chairman expire in February, the Biden administration could appoint up to three new members in the coming months, with two governors’ terms expiring and a vacant seat that must be provided.
At a Senate Banking Committee hearing on Tuesday, Senator Elizabeth Warren told Powell opposite that she would oppose his re-appointment, saying her record on financial regulation “concerns me very much.”
“You’ve acted to make our banking system less secure, and that makes you a dangerous man to run the Fed and that’s why I will oppose your re-appointment,” Warren said.
But Powell has Yellen’s backing, and “could probably still count on bipartisan support for confirmation” if nominated by the Biden administration for a second term, Bloomberg Reports.
Impact of interest rates on housing
Mortgage rates can have a big impact on the amount of home a buyer can afford, but there is an ongoing debate about the impact of mortgage rates on home sales and prices.
If a buyer can afford to pay $ 2,000 per month, he or she can qualify for a mortgage loan of $ 475,000 with an interest rate of 3%. But if the same buyer has to pay 4% interest, they can only afford to borrow $ 420,000. At an interest rate of 5%, a buyer who can afford a monthly mortgage payment of $ 2,000 cannot borrow much more than $ 375,000.
So on paper at least, every 1 percentage point increase in the mortgage rate decreases their purchasing power by about $ 50,000. This simple analysis does not take into account taxes and fees, nor the amount saved by the buyer for a down payment.
Home prices and sales are also affected by the availability of mortgage credit, the supply of listings and the pace of new home construction.
A recent analysis by New York Fed economists, Fed economists concluded that the low interest rates that buyers enjoyed during the pandemic can only explain part of the rapid and recent increase in the value of houses. Low interest rates had a bigger impact on home sales and new home construction, which “are very sensitive to interest rates,” according to the report.
Another academic study based on survey found that changes in mortgage rates have only a moderate effect on consumers’ willingness to buy a home under different financial scenarios. An increase in household wealth or the ability to buy a home with a lower down payment had a larger effect on willingness to buy, the study found.
Email Matt Carter